Nation's Housing

U.S. Files Briefs to Halt Markup of Closing Fees

WASHINGTON--In an unusual series of legal moves, the Bush administration has quietly intervened recently in private lawsuits in an effort to establish a single, critical point of consumer law: Mortgage lenders, title agencies and other companies are not allowed to mark up the costs of any services that are part of a home real estate settlement.

Like firefighters scrambling to fight new flare-ups, teams of lawyers from the Department of Justice and the Department of Housing and Urban Development have filed friend of the court briefs in class-action suits pending in three far-flung federal appellate courts. In each case, homeowners have alleged that they were charged "unearned" and "marked up" fees at their mortgage settlements.

Normally the federal government pays little attention to private suits in which the government is not a party.

But the three rapid-fire interventions in markup cases in recent weeks are special: Though federal housing officials are adamant that their longtime policy banning all markups is correct, the government's position has been rejected by two successive federal appellate courts.

As a result of those rejections, home mortgage borrowers in eight states have no legal protections against marked-up settlement fees--no matter how high or blatant the excess fees may be. The courts' decisions affect home buyers and refinancers in Maryland, Virginia, West Virginia and the Carolinas (the federal judicial 4th Circuit) and in Illinois, Wisconsin and Indiana (the 7th Circuit).

In practical terms, a lender or settlement agent in those states can legally charge mortgage clients $450 for an appraisal that cost the lender $20 or less in electronic form, or can charge $65 for a credit report that costs just $12. Similar discrepancies exist for most other settlement-sheet line items.

HUD has prohibited markups nationwide for more than a decade. But in a decision last year involving markups of title fees for Chicago home buyers, the 7th U.S. Circuit Court of Appeals ruled that HUD's ban was not sufficiently supported by the language of the federal Real Estate Settlement Procedures Act, a consumer protection law for home buyers enacted in 1974.

HUD Secretary Mel R. Martinez, a lawyer and recent home buyer himself, disagreed sharply with the appellate court's interpretation last October and announced an intensified crackdown on markups for 2002. Currently the agency has "over 100" investigations under way against alleged settlement fee markup schemes, according to federal officials.

Despite the strong policy statement from the HUD secretary, a second appellate court rejected the agency's ban on markups last May. In that case, a Maryland homeowner was charged $65 for a credit report she alleged cost the lender, Crossland Mortgage Corp., $15 or less.

Faced with two straight defeats, lawyers at HUD and the Justice Department decided to intervene in markup cases in other judicial circuits around the country.

Part of their intent is to defeat their mortgage and title industry opponents in at least one appellate court, thereby clearing the way for a final resolution of the dispute by the U.S. Supreme Court.

The high court virtually always reviews issues where appellate courts have disagreed among themselves--leaving the application of federal law starkly different for citizens who live in different jurisdictions.

On Sept. 3, Justice Department and HUD lawyers intervened as a friend of the court in a case in the Midwest (8th Circuit) involving alleged credit report and appraisal fee markups by the Bank of America.

In this case, a lower court had earlier supported the government's position that HUD's policy statement on the settlement law should be given deference by federal courts.

Justice and HUD also intervened recently in a Florida suit (11th Circuit) where home buyers alleged that Chase Manhattan Mortgage Corp. illegally overcharged them on courier fees at settlements; and in a Chicago case (7th Circuit) involving alleged markups by a title agency. In the latter case the government is asking the appellate court to reconsider its now-controversial decision of 2001 that opened the floodgates to unlimited markups at real estate closings.

The upshot for consumers? The federal government says markups are illegal in all states except the eight mentioned above.

However, many lenders, title agencies and settlement firms continue to lard markups onto settlement sheets around the country, according to federal investigators--convinced that no federal court, or Congress, will tell them the practice violates federal law.